The Large CPC Joke: Why Price Per Click on Doesn't Matter For Excessive ROI Advert Campaigns
People keep asking me the same question about AdWords:
"What does a good price cost per click?"
My answer to them is always the same:
"Why do you care?"
Most people got AdWords wrong. You are obsessed with the cost.
They know that more and more competitors advertise on the platform, which drives up prices.
So you don't know how much to spend.
That is the wrong approach.
Instead, they should worry about what they will get in return.
I know that doesn't sound intuitive. However, I almost never worry about the cost per click for keywords.
In fact, I almost always ignore them.
I'll show you why in many cases CPC doesn't matter. I'm going to show you how worrying about keyword cost can lead you astray over and over again.
Then I'll show you what to analyze to make sure you're not leaving a lot of money on the table.
Why the cost per click doesn't matter (and what to analyze instead)
Every year companies analyze the most expensive keywords in the country.
These are usually competitive laws or insurance companies that can cost up to $ 50 with just a click.
The insane thing is that almost none of those clicks turn into customers right away.
Instead, they usually decide which form to use first.
That means you might have to settle the bill for 50 or 100 clicks before anyone ever converts.
We're talking thousands of dollars for a single customer.
It makes sense on the surface; CPC ultimately determines how much you have to spend.
WordStream, for example, always publishes an annual update of the cost-per-click benchmarks in various industries.
The companies I own are all software related. However, we work with customers from different industries. So it's always interesting to look at these cost breakdowns.
Average ecommerce CPCs might be as low as around a dollar while the law can go as high as six dollars (these are higher than most Bing Shopping campaigns that should be considered for ecommerce businesses as well).
To be honest, I'm not obsessed with the cost alone.
The first reason depends on what the study says above: averages.
Average CPCs don't really mean much.
Popular, general terms are usually not that expensive.
Only a tiny percentage of the people who ever click on it will convert. While a more commercial long-tail keyword is going to be incredibly expensive.
Just compare the cost difference between "Taxes" and "Paying Taxes back":
See? It's not even close.
This makes it difficult to use a standard industry average benchmark for in-depth analysis.
There's another reason I don't want to just look at cost – because you often forget about the other side of the equation.
Conversions ultimately have a much bigger impact than costs.
Now let's look at the industry average conversions from the same study:
Ok, now we're getting a little closer.
If you recall, the industry average CPC for e-commerce was only around a dollar. In fact, it was one of the cheapest CPCs on the entire list.
Now, if you look at the average conversion rates, you'll see why.
Your conversion rates are also among the lowest.
What does it matter if CPCs are “inexpensive” with the same low conversions?
For this reason, when creating advertising estimates, you often want to consider the cost per action (or acquisition).
For example, this is the effective price you pay to generate a lead.
It's a value for money. It takes things like costs and conversions into account to come up with a much better number: ROI.
The industry average cost per action for e-commerce is consistent with the information on the search network.
So from the ROI standpoint, there is almost no difference.
Because of this, CPC is almost meaningless.
Yes, it is important up to a point as it affects things like your cost per action.
However, what is ultimately more important is the revenue that you can generate.
It doesn't matter if the ads are Google AdWords, Facebook, or even Twitter. The message is still the same.
Digital Marketer once ran a Twitter Lead Gen campaign that tested the effective cost per action (or lead).
One campaign recorded a cost of $ 7.81 per lead.
They then ran the same study with the same ad and audience targeting. This time they optimized the campaigns to increase conversions.
It generated a cost of $ 1.38 per lead, resulting in a five-fold increase in lead for the same ad budget.
They've been able to get 5X conversions by simply focusing on conversions and cost per lead. You didn't even have to touch the CPC.
You can see this over and over again.
Jacob Baadsgaard of Disruptive Advertising confirms that the best PPC metrics are revenue-driven. They track lead data all the way to closed sales.
Then and only then do they make a decision about which advertising campaign is best.
It's not that cost doesn't matter. Of course they do. However, they only play a role in how much sales you can get with it.
Here is a very simple example to illustrate.
Suppose you run two advertising campaigns side by side.
The cost per click for the second campaign is twice that of the first. However, since the conversion rate is 2% instead of 1%, you can double your sales.
Would you pay twice the cost per click to get twice the revenue? Of course you would!
This happens after you've reduced the revenue from your advertising costs. The higher ad budget has already been taken into account.
Ultimately, you are still doubling your sales. It is totally worth it!
The obsession with CPC doesn't just leave money on the table. It can also lead to wasting a lot of what you are already spending.
Here are a few examples.
If you're obsessed with CPCs, you can pull the plug too soon (or too late).
There are many things that separate large businesses from small businesses.
But here's one of the biggest: Big companies spend more on advertising than small ones.
You, right? Of course, big companies have bigger budgets.
We're not just talking about dollars spent, we're also talking about the percentage of sales
Salesforce, the world's largest CRM company, spends up to 46 percent of its budget on marketing and advertising!
Crazy right
The question is why?
Why aren't small businesses spending more on advertising?
In my experience, they are often too risk averse.
They don't have equal access to capital. Hence, they are obsessed with costs rather than income.
The classic scenario is that a business owner spends a few hundred dollars on new Facebook ads only to conclude that they don't work five days later.
So they pull the plug too soon.
In almost all cases, the campaigns just have to run longer.
Jennifer Shaheen noted that campaigns should run at least 45 days before stopping. And that makes sense when you think about it.
Look at it like this.
How many sales do you need to break even? Let's hypothetically say two or three.
What are the odds that those two or three sales will land in the first few days?
Pretty slim!
It's the law of averages at work. You need a large sample size before the numbers match the projections.
It will take at least a few weeks to have statistically significant numbers. Otherwise, just guess.
All of this assumes that you know the “right” variables for advertising campaigns in advance. Which in all likelihood you are not doing.
Not because you are not smart. But because it takes a while to figure these things out!
Here's the other thing:
Often times, you actually need to increase ad spend.
Yeah you heard me right
Listen, the reason you spend money on advertising is to make money – not to save.
This means that you need to get to statistical significance as soon as possible.
For example, take a look at some CPC ranges for keywords you are about to bid on.
I like to use Ubersuggest to get this data:
The average CPC for "analytics software" is estimated to be approximately $ 12.85. Ok, not bad I guess.
Let's use this as an upper limit. We can create automated rules in the Facebook Business Manager.
If you're struggling to hit these numbers, you can create a rule to actually increase CPCs.
This will ensure that I get a better ranking over the competition and as many conversions as possible.
This could look like this in AdEspresso:
Of course, this approach is not ideal.
Because you may still be leaving a lot of money on the table.
When your CPCs go up, the campaigns will be reset or stopped.
Then your flow of lead will also stop.
Because of this, I prefer to use CPAs as goals instead of CPCs whenever possible.
Watch CPA instead of CPC
Cost Per Action performs better than Cost Per Click.
It's not as good as Revenue, however – and there is the problem.
CPAs can still be subjective.
Is a "high" CPA bad? Maybe, maybe not.
If your ecommerce CPA is over $ 100, it might be bad.
For example, almost every single campaign CPA will cost more than $ 100. So it's not bad at all.
However, it's still a much better metric to use to control ad campaign performance.
You can still identify an upper area that is making advertising campaigns unprofitable. You are based on your average sales per customer. (Later more.)
For starters, you can set automated rules to increase or decrease the overall budget based on your CPA.
In AdWords you can create new "rules" for these areas under "Bulk Actions":
Under "Change Budgets" you can set an automated rule that will either increase or decrease budgets based on the cost per conversion number.
This will tell AdWords to automatically increase your daily budget by 25 percent when the CPA is within a certain dollar range.
You can use the same strategy in Facebook too.
You set a rule that increases, decreases, or stops a campaign when the CPA reaches a certain threshold.
Managing advertising campaigns with CPA can help you generate more customers and revenue.
There is still a large section that we are forgetting.
Keyword pricing or competitive pressures aren't the only factors to worry about.
Often times, your customer base has its own problems, and you can't change that.
Therefore, focusing on sales is always the best approach.
Increase the return side of the equation to overcome external factors
Spearmint Love is one of my favorite success stories.
They've gone from a baby blog to over 991% year-over-year sales growth and have done so almost entirely through Facebook and Instagram ads.
The craziest thing is that it almost didn't happen.
They grew like weeds until … everything just stopped.
The results were consistently in decline and they couldn't figure out why.
Until one day it dawned on one of the co-founders during a walk.
Parents buy baby clothes until the baby is grown up. In other words, their customers have moved away from the company, so to speak.
The decline in advertising campaigns had nothing to do with the cost or its advertising campaigns per se.
It had everything to do with their customer base.
How on earth do you solve this problem?
By focusing on increasing sales – without touching costs.
If the CPA is too high for your numbers to work, start by increasing the average order values.
Upsells are easy, for example, when you bundle similar products.
Think about the last time you flew somewhere. You may have purchased a travel size product from a store before going through TSA.
But this product probably only cost a few dollars, right?
Check out what Jack Black is doing here and bundle several travel products together.
You will likely need all of these products if you are going anywhere.
Instead of charging you just a few dollars each, they'll charge you $ 35 for the entire package!
By simply bundling similar products together, you can charge 10x more. That means you can now also afford much higher advertising costs.
You can also use cross-sell products to increase the average order value.
For example, right under this travel package, Jack Black has some related products for you to take with you:
The price of all three items is interesting. They're all slightly smaller than the original purchase price of $ 35.
Why?
They use the price anchoring effect to make these additional products appear cheaper.
The Economist included a medium price tier for a print-only subscription. It was exactly the same price as the "big" plan for both the print and web editions.
Most people chose the combined third option because it seemed like the best deal.
However, removing the middle plan on a subsequent test resulted in people predominantly picking the cheap option instead.
Price anchoring changes the perception of cost and value.
This is why you should lead with the more expensive option. Then showcase some related products for cross-selling that are a little cheaper.
Spearmint Love also expanded its line of products to increase average order values.
They came out with decorations, like hundred dollar baby lamps.
The age of a child played a lesser role in this type of purchase. So the company remained relevant in the eyes of its customers for longer.
After increasing the average order values, consider increasing the lifetime value of each customer.
One technique is a vintage analysis that shows you which customer cohorts are already worth the most.
This is a great way to identify trends or patterns.
You can see what the most lucrative customers are doing and then apply those lessons across the board.
Acquiring new customers all the time is expensive. They have to spend a lot more to get them to buy.
Increasing buybacks from your existing customers will have a massive impact on your bottom line.
Let's look back at the original ad model to see why.
Note that this is a simplified example. But I think it still does a decent job and shows how that works.
The first campaign has a higher initial cost; You are barely balanced.
Most companies fear that. You worry about spending more money on keywords.
As a result, they completely neglect optimizing conversions, average order values, or buybacks.
So yeah, they could bring in some sales. But the higher costs will soon drain your ad budget.
The end result is a wash.
The second campaign has a higher average order value.
In this case, you won't even get any more conversions. You just bundle one product.
You are already back in the black. Not bad.
The third campaign?
Not only are the average order values higher, but you also get more repeat purchases.
They basically generate more purchases from the same number of customers. Often times, you don't even have to spend a dollar to get them.
All you have to do is send an email campaign. These loyal customers don't need much more persuasion.
More sales without increasing advertising costs increases sales.
You do the other couple of campaigns several times.
Best of all, you haven't sweated a single CPC. You have willingly paid at the high end of the budget to maximize your chances.
Then you've doubled on the other side of the equation.
Increasing conversions and earnings can act as leverage to double or triple the ROI of advertising campaigns.
Conclusion
There's only one reason to spend money on ads at the end of the day: to make money.
Tracking the keywords with the lowest CPC is a loss.
If anything, consider spending more money. You should actually be looking for the highest CPCs in your industry.
Why?
They often offer the greatest potential. You want to maximize the highest revenue per dollar spent.
So you know all of these industry benchmark CPC numbers? Don't worry about them.
Instead, focus on CPA. That's the number it costs to acquire every new customer.
It is by no means perfect. However, it's a better number to optimize than CPC.
From there, try to figure out the sales numbers.
Can you bundle some products to increase the average order value? Can you cross-sell featured products and use price anchors to reduce perceived costs?
Then find out how to keep customers longer.
That could mean introducing new, related product lines. Or it could mean introducing “consumer goods” that people have to buy back over and over again.
It's about keeping the lifetime value of each customer as high as possible.
If you do, CPC will be even less important.
So much revenue is generated per customer that you can afford to spend almost anything to get them in the first place.
How have you increased ad campaign performance by focusing on conversions rather than costs?
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